Reason Foundation

Trading Fertility for Prosperity

Good news about trade from the dismal science

Historian Thomas Carlyle described economics as the dismal science, a pessimistic tag he came up with as he contemplated the predictions of 18th century economist Robert Thomas Malthus that population would always outstrip the food supply, leaving millions to starve. More recent research suggests that economics might better be called the cheery science. A new study finds that trade-induced economic growth leads to lower fertility and rising incomes—derailing Malthus' gloomy prognostications.

Doces' findings differs from that of other scholars, notably the analysis by Brown University economist Oded Galor and colleagues. Galor argues that the demographic transition, the shift from high birth and death rates to low birth and death rates chiefly occurred in the rich countries that comprise the Organization for Economic Cooperation and Development (OECD) and not in poor countries.

In his notorious "An Essay on the Principle of Population," Malthus suggested that people on average would produce as many children as they could feed, if not more. In modern econspeak, children are a normal good, i.e., as income increased demand for kids would also increase. But that isn’t happening now.

Instead, researchers have noted that as incomes increased, the number of children per woman has decreased. One possible explanation for this phenomenon is that the opportunity cost of raising children has risen over time. Opportunity cost is a benefit that must be given up to acquire or achieve something else; in this case, a parent would be foregoing the extra income he or she would earn working and instead spend the time rearing a child. In this analysis the price of children measured in foregone income rises over time lowering demand for them.

However, Galor points out [PDF] that in the initial stages of the industrial revolution as incomes were increasing in Western Europe, average fertility was increasing, just as Malthus predicted. (In contrast, U.S. fertility rates appear to have been falling throughout the 19th century from 7 children per white woman in 1800 to 3.5 in 1900.) Galor suggests that the opportunity cost argument for fertility decline is too simple. If income were the key determinant, one would find that fertility should fall as any country reaches a specific level of average per capita income. Instead, Galor notes that at the end of the 19th century, fertility rates begin to plummet simultaneously for a number of Western European countries at very different per capita income levels.

Galor argues that fertility began to fall as Western European economies developed increased demand for human capital during what he calls the second phase of the industrial revolution. In this analysis, initial increases to average incomes produced by technological progress resulted in parents increasing both the quantity and quality of their children. However, toward the end of the 19th century, Galor asserts, “further increases in the rate of technological progress induced a reduction in fertility, generating a decline in population growth and an increase in the average level of education.” Parents began to invest in quality over quantity.

As economic growth was increasingly fueled by the development of ever more complicated technologies and management services, the premium to education began to increase. The result is that parents switched from having more children to investing in higher quality (more educated) children.

OECD economist Fabrice Murtin, using data from 71 countries from 1870 to 2000, recently estimated in his study, “On the Demographic Transition,” [downloadable here] that “education, rather than income or health-related variables, is the most robust determinant of the birth rate, potentially explaining about 50 to 80 percent of its decrease when average schooling grows from 0 to 10 years.” Galor cites data showing that the percent of British children ages 6-14 who were in school rose from about 10 percent in 1860 to more than 80 percent by 1895.

So far, so good. But Galor argues that at the turn of 20th century international trade encouraged fertility rates to fall further as rich countries began to specialize in the production of the sorts of goods that required a lot of human capital to make. On the other hand, poor countries increasingly specialized in goods that required a lot of manual labor to produce. The result was rising incomes for both rich and poor countries, but a fateful divergence in fertility trends.

During the 20th century, fertility rates basically continued to fall in rich countries as they invested in more human capital, especially in higher levels of education. In addition, as demand for human capital grew in rich countries, schooling expanded to include women who then entered the paid workforce. This further raised the opportunity costs of having children and encouraged further fertility reductions.

Meanwhile poor countries channeled a larger share of their gains from increased international trade into producing more children. As a consequence, “the demographic transition in these non-industrial economies has been significantly delayed,” asserts Galor, “Increasing further their relative abundance of unskilled labor, enhancing their comparative disadvantage in the production of skill-intensive goods, and delaying their process of development.”

In the second half of the 20th century many poor countries began to see rapid declines in their fertility rates. Doces looks at recent data from a large number of countries and finds that those that are most open to international trade are the ones experiencing the fastest decline in their fertility rates. Doces argues that the primary cost of having children is the time and money it takes to raise them which leaves parents less time to consume other goods. International trade expands the types and lowers the costs of the goods people can enjoy. The cost of rearing children does not decline substantially so they become more expensive relative to the new opportunities and goods afforded by increased international trade.

In addition, Doces cites research [PDF] that shows “increasing international exchange and communication create new opportunities for income-generating work and expose countries to norms that, in recent decades, have promoted equality for women.” As a result, trade-induced demand for human capital expands to include women, further cutting fertility rates even in poor countries.

Recent research by University of Helsinki economists Ulla Lehmijoki and Tapio Palokangas bolsters the finding that in the short run trade liberalization boosts birth rates, but in the long run it cuts fertility. Again, largely because it encourages the development of women’s human capital (education), which makes child-bearing relatively more costly.

In the mid-20th century, some economists promoted the autarkic import-substitution development fad that involved imposing high tariffs on imports and the creation of state-owned manufacturing enterprises. The Helsinki researchers suggest that import substitution may have “slowed down capital accumulation and thereby prolonged the period of high population growth” in countries that adopted such policies.

History shows that a world without trade is impoverished, ignorant, misogynistic, and overpopulated relative to available resources. That’s the world that our ancestors lived in [PDF]. In the modern era, trade liberalization promotes a virtuous cycle that boosts incomes, raising the value of education, resulting in the protection of women’s rights, and eventually inducing a fall in fertility rates. That’s really good news from the science formerly known as "dismal."